By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) -European Central Bank policymakers hailed victory over runaway inflation on Friday even as some warned that it was now at risk of going too low, rekindling memories of anaemic price growth in the pre-pandemic decade.
The ECB cut interest rates on Thursday for the eighth time in the past year and signalled at least a pause in policy easing next month since inflation was now safely back at its 2% target after three years of overshooting.
Part of the argument for the pause is that economic growth is better than feared, a premise underpinned by fresh data showing the euro zone economy grew by 0.6% in the first quarter, above the 0.3% estimated earlier, and retail sales were also robust.
However, the strong growth figure is an anomaly, many economists say.
It was driven by frontloaded exports to the United States before tariffs kicked in and data was especially distorted by Ireland, where growth is fuelled largely by activity among big foreign companies based there for tax reasons.
Portuguese policymaker Mario Centeno, who has long warned about the risk of price growth going too low, said his colleagues should be alert inflation dipping too far below 2%.
“The inflation rate (in the euro zone) is currently below 2% and this downward trend will worsen until the beginning of next year, when it will approach the dangerous level of 1%, or slightly above that,” he said in Lisbon. “This is a scenario that should alert us,” he said.
Finland’s Olli Rehn said there was a particular risk from the escalation of the trade war with the U.S. and the outlook was so complex, the ECB’s adverse scenario could not take into account all outcomes.
“For example, serious disruptions to supply chains and disruptions in financial markets have been excluded from the analysis,” Rehn said in a blog post.
Part of the reason inflation could go lower is that Germany, the bloc’s biggest economy, will stagnate this year, marking the third year of zero or negative growth as its long-predicted recovery keeps getting pushed further and further out.
While Germany’s new government plans to sharply increase fiscal spending on defence and infrastructure, this will not significantly boost growth until the end of 2027, the Bundesbank said as it cut growth projections for this year and next.
“Concerns about a persistent undershoot may soon resurface, especially if trade tensions escalate, weighing on demand,” Oxford Economics said in a note.
Others took a more benign view that was more in line with the ECB’s view that inflation will rebound and hit the bank’s 2% target.
“The ECB’s 2% inflation target has essentially been achieved,” Estonian policymaker Madis Müller said. “The expected economic growth in the next couple of years is also likely to be quite moderate, which means that there is no reason to worry too much about price pressure related to the heating up of the economic environment.”
Latvia’s Martins Kazaks said he was also comfortable with the outlook and made the case for the ECB to take a break in cutting rates, partly to preserve policy space and to await fresh data.
“I don’t think the market should expect the trajectory of cutting rates at every meeting to continue,” he told Reuters. “There is no need and there is value in maintaining policy space.”
(Reporting by Balazs Koranyi and Francesco Canepa; Additional reporting by Sergio Gonçalves; Editing by Susan Fenton)
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